Tuesday, November 25, 2014

This year has proven to be exceptionally well for mid cap and small cap companies. The BSE Mid Cap Index is up by 52% and the Small Cap Index is up by 73% since beginning of 2014, many small and mid cap stock prices have multiplied by 2 to 3 times or even more. Is the time to book profits?

Lets take a look at Small Cap Index graph of last 10 Years:

We would like to inform you that Mid Cap index is marginally up by 1% and Small Cap Index is still down by 20% from its Jan 2008 highs. However, Sensex is up by almost 35% over the same period and at a new life time high. We suggest our members to continue holding fundamentally strong companies as we expect small and mid cap companies will continue to outperform major indices - Sensex & Nifty during next 2 to 3 years.

We believe that this is just the beginning, the economy is expected to move to a 7% growth trajectory in next couple of years which will help small and mid cap companies to flourish much faster compared to large caps. However, correction or consolidation in stock prices in short term cannot be ruled out. With both earnings and balance sheets likely to improve, small and mid cap segment will continue to remain attractive over period of next 2 to 3 years.

Power of Investing in Small Caps

On 2 January 2004, Hawkins Cooker had a
market cap of Rs 14.5 crore and its stock was at Rs 27.50. On 24th Sept'14 the stock price closed at Rs 3637.50 and the company's market cap
is Rs 1,923 crore. Rs 1 lakh invested in Hawkins in Jan 2004 is worth Rs. 1 Crores and 31 lakhs today!

It has been one of the wealth creators in
the Indian stock market which has given more than 50 percent annualized return to
investors over the last 10 years. Lets take another example of little known company Camlin Fine Sciences which is
our 10-Bagger stock. We identified this Hidden Gems 3 years back and recommended it to our Hidden Gems membersat price ofRs. 6.05 (adjusted price after 2
splits - from share face value Rs. 10 to 2 and recently from Rs. 2 to 1, actual
recommended price was Rs. 60)andtoday it’s atRs. 60 giving absolute returns of 895%. Moreover, itsa 30-Bagger stock for investors who
invested in it 5 years back. Company was trading atRs. 2 (split adjusted price) with
market cap of merely 19 crores in Feb 2009, today market cap of the
company is 574 crores.

Here is the brief about the company:

Camlin Fine Sciences Ltd:Camlin Fine Sciences Ltd is one of theIndia's leading manufacturers and exporters
of Bulk Drugs, Fine Chemicals and Food Grade products. The company manufactures
active pharmaceutical ingredients (API's), food antioxidants and sweeteners.
Company acquired subsidiary of Borregaard in March 2011 which was expected
to help Camlin Fine Sciences in realizing better operating and profit margins
in coming quarters. This acquisition ensured the easy availability of raw
material Hydroquinone manufactured by Borregaard for Camlin Fine Sciences
ltd. Company also introduced new products and continuously strengthening
its marketing activities throughout Europe andUSA. The scrip was trading at 4 X FY
2011-12 estimated earnings leaving good scope for stock price appreciation.

The number of small-cap stocks is large
and finding a quality stock that can give high returns over a long period is
tough even for equity analysts. One reason is that such stocks usually have a
short history and are not tracked by many analysts and brokerage houses. Then
there are risks such as low liquidity, governance concerns and competition from
larger players.

Scores of once small companies have over
the years grown big, giving investors a 30-50 per cent annual return over 10-15
years and creating fortunes for investors. However, more often than not, we
find ourselves at the wrong side of the fence and regret our inability to spot
such stocks on time.

Those who wish to invest in small-cap
stocks should do so only if they have a long investment horizon and tolerance
for volatility. Small-cap stocks suffer the steepest falls in a bear market and
rise the most in a bull market. An investor should stay invested for at least
three-five years to allow their portfolio to gain from at least one bull run.

Benefits of Investing in Small Caps

1. Huge growth potential: The first and the most important
advantage that a small cap stock gives you is their high growth potential. Since
these are small companies they have great scope to rise as opposed to already
large companies.

2. Low Valuations: Usually small cap
stocks are available at lower valuations compared to mid &
large caps. Hence, if you invest in good small cap companies at initial
stage and wait for couple of years, you will see price
appreciation not only because of growth in top line and bottom line but
also due to rerating which happens with increase in market capital of
the company.

3. Early Entrance Advantage: Most of the fund house and
institutions do not own small caps with low market cap due
to less liquidity which make it difficult for them
to own sufficient no. of shares. This gives retail investors an
opportunity to be an early entrant to accumulate such companies
shares. When company grows in market cap by delivering consistent
growth and becomes more liquid, entry of fund houses and
institutions push the share prices up
giving maximum gains to early entrants.

4. Under–Researched: Small cap stocks are often given the
least attention by the analysts who are more interested in the large companies.
Hence, they are often under - recognized and could be under-priced thus giving
the investor the opportunity to benefit from these low prices.

5. Emerging Sectors: In a developing economy where there
are several new business models and sectors emerging, the opportunity to pick
new leaders can be hugely beneficial. Also the disruptive models in the new age
is leading to more churn and faster growth amongst the nimble footed smaller
companies.

Concerns while Investing
in Small Caps

1. Risk: The first and the most important disadvantage a small
cap stock is the high level of risk it exposes an investor to. If a small cap
company has the potential to rise quickly, it even has the potential to fall.
Owing to its small size, it may not be able to sustain itself thereby leading
the investor into great loses. After all, the bigger the company, the harder it
is for it to fall.

2. Volatility: Small cap stocks are also more
volatile as compared to large cap stocks. This is mainly because they have
limited reserves against hard times. Also, it in the event of an economic
crisis or any change in the company administration could lead to investors
dis-investing thereby leading to a fall in prices.

3. Liquidity: Since investing in small cap stocks
is mainly a decision depending upon one’s ability to undertake risk, a small
cap stock can often become illiquid. Hence, one shouldn’t depend upon them for
an important life goal.

4. Lack of information: As opposed to a large cap company,
the analysts do not spend enough time studying the small cap companies. Hence,
there isn’t enough information available to the investor so that he can study
the company and decide about it future prospects.

Saral Gyan team do take care of above
concerns by doing indepth research and analysis of small cap companies
before releasing research reports with buy recommendation. Its
sincere efforts, dedication and passion of our equity
analysts that 19 out of 30 Hidden Gems released by our equity analysts
have given more than 100% returns to our members. If you have
patience and want to add extra power in your portfolio, start investing some
portion of your savings in fundamentally strong small companies - Hidden Gems.

Investing systematically is a great way to build your investment portfolio. It is a simple and time tested approach for accumulation of wealth in a disciplined manner. Simply get some savings from your monthly income and invest in equities for long term. SIP not only allows you to save every month in a disciplined way but also help you ride through ups and downs of stock market.

You can start investing in a particular stock once in a month. Next month, same amount would be invested in another stock which at that point of time gives you good medium to long term investment opportunity. This could be an ideal choice for salaried employees as well as businessmen / entrepreneurs, as it will help you to invest in fundamentally strong small and mid cap companies to build a diversified portfolio of high quality small and mid cap stocks over a period of time to achieve wealth creation.

Invest some portion of your monthly income in good companies without timing the stock market and you will definitely get rewarded in long run.

Just take care of Basic
Principle of Investing in Equities:

1. Invest in stock market with a long term
view (3 - 7 years or more).

2. Invest in companies which are
fundamentally strong with scalable business.

3. Follow disciplined approach by
Investing regularly in equities.

4. Build a diversified portfolio by
investing in small & mid cap companies.

6. Review performance of your holding
companies at least once a year to decide whether to buy / sell or hold.

Lets review how SIP approach have
benefited our Hidden Gems members during last 4 years. Below is the table
which illustrates value of Rs. 10,000 invested (every month) in our recommended Hidden
Gems (Unexplored Multibagger Small Cap Stocks) stock of each month vis a vis value of Rs.
10,000 invested in BSE Small Cap Index during last 4 years.

(Click on the
image if not visible)

We are delighted to share that average
returns of Saral Gyan Hidden Gems (30 stocks) during last 4 years is 261%
compared to 55.2% of BSE Small Cap Index. Investment of Rs. 10,000 in Hidden
Gems stock of each month during last 4 years not only allowed you to save Rs. 3 lakh but
also appreciated your investment more than 3.5 times making your total Hidden
Gems stocks portfolio of Rs. 10.8 lakh with overall profit of Rs. 7.8 lakh.
However, if you would have invested the same amount in Small Cap Index, you would be
sitting with total gains of Rs. 1.65 lakhs.

Total 21 Hidden Gems out of 30 during last 4
years have given more than 100% returns to our members, Moreover,
there are total 14 stocks (as highlighted in yellow colour) which have given returns in
the range of 200% to 1000%. We are hopeful that we will continue to hunt best
Hidden Gems from universe of small caps by doing authentic, in-depth and unbiased
research work and support our members to make educated investment decision.

Not everyone has the time
and inclination to analyse stocks and be able to identify potential wealth
creators. If that’s the case for you as well, don’t fret. Choose our services
and invest in good quality stocks yourself, that outperform the benchmark
consistently over a period of 5-10 years and put your money at work. The
strategy remains the same — identifying wealth creators and investing in them
for long term. Through Hidden Gems and Value Picks,
we're providing you opportunities to invest in such small / mid caps
stocks today. Infosys, Pantaloon, Dabur, Glenmark were the small
cap stocks in past and today are the well known companies falling under
mid and large cap space. Check out: Hidden Gems & Value Picks 2014 - Performance Update

The stocks we reveal
through Hidden Gems & Value Picks are
companies that are either under-researched or not covered by other stock
brokers and research firms. We keep on updating our subscribers on our past
recommendation suggesting them whether to hold / buy or sell stocks on the
basis of company's performance and future outlook.

Saral Gyan Capital Services

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